PACE Act changes rules for when qualified health plans may be offered through cafeteria plans

PACE Act changes rules for when qualified health plans may be offered through cafeteria plans

October 8, 2015

H.R. 1624, the “Protecting Affordable Coverage for Employees” (PACE) Act, passed by Congress and headed for the President’s desk for his expected signature, revises the non-tax definition of small and large employers for purposes of the Patient Protection and Affordable Care Act (PPACA), more broadly known as the Affordable Care Act, or ACA. However, the PACE Act also ends up modifying a benefits-related tax rule, namely the Code Sec. 125(f)(3) rule permitting certain qualified health plans to be offered through cafeteria plans.

Background. For tax years beginning after Dec. 31, 2013, a “qualified health plan” (QHP) offered through a health insurance Exchange generally is not a qualified benefit that may be offered through a cafeteria plan. (Code Sec. 125(f)(3)(A)) However, a QHP may be offered through a cafeteria plan if an employee’s employer is a “qualified employer” offering the employee the opportunity to enroll in a QHP through a health insurance Exchange in a “group market.” (Code Sec. 125(f)(3)(B) )

A qualified employer is a “small employer” that elects to make all of its full-time employees eligible for one or more QHPs offered in the “small group market” through an Exchange that offers qualified health plans. (PPACA Sec. 1312(f)(2)(A)) Under current law, for this purpose, a small employer is one that employed an average of at least one but not more than 100 employees on business days during the preceding calendar year, and employs at least one employee on the first day of the plan year (PPACA Sec. 1304(b)(2)(A)); but a state can elect, for plan years beginning before Jan. 1, 2016, to treat an employer with no more than 50 employees as a small employer. (PPACA Sec. 1304(b)(3))

RIA observation: In other words, the 50-employee cutoff for small employers was effectively scheduled to rise to 100 employees for plan years beginning on or after Jan. 1, 2016.

New law. Under the PACE Act, effective on enactment, a “small employer” is one that employed an average of at least one but not more than 50 employees on business days during the preceding calendar year, and employs at least one employee on the first day of the plan year. (PPACA Sec. 1304(b)(2)(A), as amended by PACE Act Sec. 2(a)(2)) However, a State may treat as a “small employer” an employer who employed an average of at least one but not more than 100 employees on business days during the preceding calendar year, and who employs at least one employee on the first day of the plan year. (PPACA Sec. 1304(b)(3), as amended by PACE Act Sec. 2(a)(3))

RIA observation: In a cost estimate for the PACE Act, the Congressional Budget Office predicted that most states won’t increase the 50-employee threshold.

Related change. Beginning in 2017, each state will be able to allow issuers of health insurance coverage in the “large group market” in that state to offer QHPs through an Exchange. If a state allows issuers to offer QHPs in the large group market through an Exchange, the term “qualified employer”—including for purposes of Code Sec. 125(f)(3)—will include a large employer that elects to make all full-time employees of the employer eligible for one or more qualified health plans offered in the large group market through an Exchange. (PPACA Sec. 1312(f)(2)(B))

Under current law, a “large employer” is one that employed an average of at least 101 employees on business days during the preceding calendar year, and employs at least one employee on the first day of the plan year. (PPACA Sec. 1304(b)(1))

New law. Under the PACE Act, effective on enactment, a “large employer” is one that employed an average of at least 51 employees on business days during the preceding calendar year, and employs at least one employee on the first day of the plan year. (PPACA Sec. 1304(b)(1), as amended by PACE Act Sec. 2(a)(1))

RIA observation: As noted above, the PACE Act was designed as a non-tax measure. According to Senator Jeanne Shaheen (D-NH), one of its co-authors, the bill is designed to protect America’s small businesses from healthcare premium increases under the ACA. According to a press release by her office, “Currently under the Affordable Care Act, on January 1, 2016, the definition of the state based small group markets is scheduled to change from 50 to include employers with up to 100 employees. This change would require many small and mid-sized businesses to be subject to different rating rules and requirements, with the potential of increasing the health insurance premiums for small businesses, their employees and their families.” The law change is designed to avoid pushing businesses with 51 to 100 employees into the small group insurance market, which may result in higher costs.

RIA observation: The definition of large employers (technically, “applicable large employers”) for purposes of the employer shared responsibility rules (i.e., the requirement to offer minimum essential coverage to employees or face a penalty), and for employer information return purposes, is found in Code Sec. 4980H, which has not been amended by the PACE Act.